Tax breaks for pensions

The Sunday Independent reports that an important debate is taking place within the Commission on Taxation:

“But its report may also call for a reduction in tax relief for ordinary private sector pension-holders and a “fierce argument” is raging within the commission over the €2.9bn cost of this relief versus the incentives that it gives to provide for the future.”

The idea of limiting tax breaks on pension contributions has received a good deal of attention, with Fintan O’Toole a notably vocal advocate (see here).  This focus is understandable given that the better off are the primary beneficiaries of the tax breaks.  

The fact remains that many households – even better off ones – are not saving enough to sustain their living standards in retirement.  This is compounded by staggering losses in both defined contribution and defined benefit pension plans.  (See Brendan Walsh’s post from December on the crisis in occupational pension plans.) 

The tax incentive can be viewed as a device to overcome the inertia that keeps people from making adequate pension provision.  As such, I would agree that it is not particularly efficient.  But it is encouraging to see that at least some on the Commission believe it is important to approach pension reform in a comprehensive manner rather than simply eliminating the existing incentive.

The Green Paper on Pensions looked at the possibility of moving to some sort of mandatory or “soft mandatory” (with default) contributions to retirement savings accounts.   Unfortunately, with households being squeezed from so many different directions, it is hard to see from where they would find the money.  In a post a few weeks back, I proposed the idea of a Swedish-style system of unfunded – or “notional” – defined contribution accounts that could at least reduce the pressure for other tax increases.

What is most important is that reforms take place in the context of an overall plan for the retirement income system.   The complexities and importance of pension reform are such that it should not be driven solely by short-term fiscal considerations.